Achieving your financial goals doesn’t just happen by itself. It takes a plan, implementing the plan, adhering to the plan, and when necessary, adjusting the plan. I look at is as less of a straight line and more of a circle. Periodically circling back to reevaluate your plan, determine whether it’s on track, figure out if you need to implement anything different, and adjust if necessary. A straight line seems to indicate that there is a pre-determined end. Viewing the planning process as a circle helps signify that it is fluid and continuous and the process lasts as long as you need it.
Why take the time to plan… I mean really implement an actual plan? Well, the old adage is “failing to plan is planning to fail.” And, I believe that is correct. So, don’t plan to fail. Plan to succeed!
According to the Department of Labor:
- Only 40% of Americans have calculated how much they need to save for retirement.
- In 2018, almost 30% of private industry workers with access to a 401(k) plan or something similar did not participate.
- The average American spends roughly 20 years in retirement.
Nearly everyone will receive Social Security, but for many Americans, Social Security won’t pay all the bills.
- Regularly saving is critical. Beginning an automatic payroll deduction into a retirement account can be a great way to save for retirement. I’d recommend 10-20% of your pretax income if you are able to save that much. In a traditional retirement plan like a 401(k), 401(b), or SIMPLE IRA the money comes out pre-tax. So contributing 10% of your income pre-tax will result in a paycheck that looks like less than 10% was taken out (contact me if you would like me to walk you through the math… once you realize how powerful that can be, you may wind up wanting to contribute more than you initially thought!)
If you can’t contribute that much to start… that’s okay, begin with what you think you can afford each paycheck. If your employer matches the first 2% or 4% of your pay… try to contribute at least that amount to get that contribution match of “free” money. Every time you get a raise, your contributions will automatically grow, too (unless you’ve reached the maximum contribution). Also, see if you can increase your contribution percentage by a little, too! Over time, you’ll find that you can get to 10% or 20% employer sponsored retirement savings, and probably won’t even miss it as you have adjusted your lifestyle over time. In fact, once you start to see your retirement account growing over time through both contributions and gains, you may be motivated to save even more!
- Start as early as you can. I have two kids who have recently graduated college, one in college and one still in high school. Time flies by quickly. In their minds, retirement is still a world away, if not another universe.
That’s the case for many young people. But by the time they realize it, they could have benefitted from the magic of compounding. The savings many of us socked away in our 20’s and 30’s when we were much younger has helped pay big dividends now that we are in our 50’s and older.
Let’s illustrate by way of example. Tom is 28 years old and plans to save $500/month or $6,000 per year until he retires at 65. With an annual return of 7% (assuming annual compounding), Tom will have amassed $962,024 when he turns 65 years old. Total contributions: $222,000.
Kate decides to put away the same amount. Kate is 22 years old and will save for 43 years. While her time to contribute is only an additional six years, her decision to start early is rewarded with a portfolio of $1,486,659. Total contributions: $258,000.
Because Kate started sooner, the additional $36,000 amounted to an additional $524,635! Of course, that’s straight-line math, not real returns and those amounts could vary significantly based on real life results, both on the upside and downside. But, you hopefully get the gist. (Source: Investor.gov Investment Compound Calculator. Calculations assume a tax-deferred account.)
- What plan best fits my need? That question will depend on your personal circumstances. For many, your company’s 401(k) is tailor-made to save for retirement. This is especially true if your firm has a matching contribution.
Whether to fund a traditional IRA or a Roth IRA depends on many factors, including your marginal tax rate today and expected rate in retirement.
A Roth offers tax advantages if you qualify. Generally speaking, withdrawals from a Roth IRA are tax-free in retirement if you are age 59½ or older and have held the account for five years. But you won’t capture a tax deduction on contributions.
Current tax law does not require minimum distributions, which can be a big advantage as you travel through retirement.
A Roth may also be advantageous if you do not believe your marginal tax rate will fall much in retirement or if you have outside assets that limit your need to withdraw on your retirement savings.
- How much will I need at retirement? Again, much will depend on your individual circumstances. Your retirement expenses and lifestyle will dictate your portfolio needs.
An old rule of thumb that you’ll need 70% of pre-retirement income may not suffice for many. For example, will you still be paying on a mortgage after you retire? Or, do you plan to downsize, which may reduce or eliminate monthly mortgage outlays?
One approach some folks consider is the 4% rule. It’s relatively simple. Withdraw 4% of your total investments in the first year and adjust each year for inflation. Keep in mind, however, that this is a rigid rule. It assumes a 30-year time horizon and minimizes the risk of running out of money. Depending on Social Security and any pension you may have, a more generous “allowance” from your savings may be in order.
Personally, I hate “rules of thumb.”
Your situation isn’t the same as your neighbors, your family, a friend or mine. I strongly suggest you look at your personal situation and don’t leave your retirement up to a general rule that may not even apply to you.
- How do I find the right mix of investments? What worked when you were 30 years old probably isn’t appropriate if you’re now in your 50’s or 60’s… and that may change again in your 70’s and beyond.
While our advice will vary from investor to investor, there are studies that can help us predict which strategies work best in particular situations. As a financial planner that also has an extensive background in pharmaceutical science, I believe studies and software that can help “prove” a specific retirement strategy is more appropriate for a client is better than just “feeling” like things should work out.
Your investments should reflect the planning stage you are in, your goals and values, your ability to take (or not take) risk, the assets that you have accumulated, and other income sources available to you.
- I’ve saved all my life. How do I begin withdrawing from my savings? It’s a complete shift in the paradigm. No longer are you socking away a percentage of each paycheck. Instead, you are living off your savings.
First, if you are required to take a minimum distribution from a tax deferred account, take it.
Next, consider the effect of taking interest, dividends and capital gains distributions from taxable investments, allowing you to continue to tax shelter assets that are still in retirement accounts.
Coordinating your required minimum distributions, withdrawals from taxable accounts and tapping income from tax-deferred or tax-free accounts should be coordinated on a year-by-year basis. Taking enough income to filling up your “lower” tax bracket without pushing yourself over into a higher bracket should be something discussed with your advisor yearly in retirement, and coordinated with your accountant, too. The goal is to take enough income from the right “buckets” to help minimize your tax liability, which puts more money back in your pocket… and less in the governments.
Bottom line
Let me reiterate that many of these principles and strategies discussed above are simply guidelines. One size does not fit all. Plans we suggest are tailored to one’s specific needs and goals. If you have any questions, we would be happy share our recommendations. We’re simply a phone call or email away!
A September pothole
The S&P 500 Index surged an impressive 60% from the March 23 bottom to the most recent high in early September (St. Louis Fed S&P 500 data). But stocks hit a roadblock in September.
Table 1: Key Index Returns
| MTD% | YTD% | |
| Dow Jones Industrial Average | -2.3 | -2.7 |
| Nasdaq Composite | -5.2 | 24.5 |
| S&P 500 Index | -3.9 | 4.1 |
| Russell 2000 Index | -3.5 | -9.6 |
| MSCI World ex-USA* | -3.1 | -9.0 |
| MSCI Emerging Markets* | -1.8 | -2.9 |
| Bloomberg Barclays US Aggregate Bond TR | -0.1 | 6.8 |
Source: Wall Street Journal, MSCI.com, Morningstar, MarketWatch
MTD return: Aug 31, 2020-Sep 30, 2020
YTD return: Dec 31, 2019-Sep 30, 2020
Given the incredible run, a pullback was inevitable. But as I’ve counseled before, the timing, magnitude and duration of a pullback is impossible to predict. Your success is based, at least in part, on time in the market, not timing the market. With that said, there are also strategies that we offer which can help reduce the risk of a market downturn. I’d be happy to discuss them as they are outside the scope of this month’s newsletter.
There were several factors that played a role in last month’s pullback.
- Any uncertainty creates a good excuse to take profits after a big run-up in price.
- Daily Covid cases in the U.S. ticked higher last month, per Johns Hopkins data.
- While it won’t be cheap, Congress has yet to find common ground on a new fiscal stimulus bill. The economic bounce in Q3 has been much stronger than most initially thought possible. But investors and many analysts believe more support is needed.
- Finally, the election is front and center. We may not have a winner on election night. Worse, a disputed election would add to investor angst.
October started off strong, but mid-month we’ve hit another blip and we’ve still got to get through earnings season and a 2020 election next month.
As we all know by now, President Trump and the first lady tested positive for Covid, injecting a new round of uncertainty into an already tumultuous election. I’m not sure how the path of the virus, vaccine clinical trial data, or how the heightened uncertainty will affect investor sentiment. And, flu-season has just begun, and although I don’t think it will be a factor before the election, it may prove to complicate things moving into the winter months.
Amid acrimony on both sides, let me first say that RockCrest’s role is to be your advisor (If you’re not currently a client, we’d love to talk if you need one!) We work hard to earn your trust. I am not a political analyst. As president and CIO, I am here to give you the firm’s view and hopefully help you make some sense of current events as we help guide your journey to, and through, retirement.
Therefore, I will carefully and cautiously review the current contest through a very narrow prism–through the eyes of a dispassionate investor focused on the economic fundamentals and how that might impact equities.
Let’s consider these facts.
- Stocks have performed well under both parties.
- The conventional wisdom isn’t always right. Recall that stocks weren’t supposed to do well with a Trump win, as investors wanted the continuity a Hillary Clinton presidency would offer.
Short term, there is often a disconnect between the stock market and the economy. I’ve written on that before (https://rockcrestfinancial.com/the-stock-market-and-the-economy-are-not-the-same-heres-why/) Longer term, stocks tend to march to the beat of the economy, Fed policy and corporate profits.
A growing economy fueled by innovation and entrepreneurship has been the biggest driver of stocks over the many decades. Let’s hope whoever wins helps further those goals. That’s not to say that there aren’t long term economic trends that are taking shape in my opinion that over the next few decades will be challenges to our economy and many other countries, too.
But it’s better to focus, for now, on the things within our sights. The markets will do they do and the election will be over before we know it. We’ve got some time to plan strategies for the issues that will take shape over the longer term.
If you have questions or concerns, please contact your advisor at RockCrest. That’s what we are here for… conversations are always welcome.
As always, I’m honored and humbled that you have given our firm the opportunity to serve as your advisor.
Warmest Regards,
Steve
Steve Boorstein, PharmD, CFP®
President & CIO